Monday, April 11, 2016

Understanding Crop Insurance: Historical Perspective—Part 1

Written by M. Sean High—Staff Attorney

Today, the Federal Crop Insurance program provides many farmers with an essential risk management tool that offers possible protections against unavoidable losses suffered do to fluctuating prices, harsh weather, disease, and pests.  Through the payment of a fixed amount of premium per acre, crop insurance allows participating farmers to shift these unavoidable production risks onto an insurance company, and as a result, better handle the often adverse conditions associated with agricultural production.  Nevertheless, for much of U.S. history, farmers did not have access to this valuable safety net.    

Born out of the financial difficulties of the Great Depression, federal crop insurance became a reality with the passage of the Federal Crop Insurance Act of 1938 (FCIA).  Prior to FCIA, while various private insurers offered farmers the ability to purchase hail insurance coverage, “no private company had successfully operated an ‘all-risk’ [multiple-peril] crop insurance program.”[1]  

In 1917, three private insurers, located separately in North Dakota, South Dakota, and Montana, independently attempted to write multiple-peril crop insurance policies.  Unfortunately, each “compan[y] suffered heavy losses because of a drought and because their ventures covered an area too small to adequately distribute their tasks.”[2]

In 1920, the Hartford Fire Insurance Company (Hartford) offered farmers an insurance policy providing coverage for crop prices and yields.  The venture proved to be unsuccessful as U.S. corn prices dropped significantly from the 1919 price of $1.50 per bushel to the 1920 price of $0.64 per bushel.[3]  Additionally, the price of U.S. wheat dropped from the 1919 price of $2.19 per bushel to the 1920 price of $1.32 per bushel.[4] As a result of these dramatic crop price declines, Hartford suffered a substantial financial loss as payments to these policy holders exceeded the collected premiums by $1.7 million.[5]

While these few private companies attempting to sell crop insurance policies were not successful, farmers continued to struggle with their unavoidable production risks. Significantly, according to 1922 United States Department of Agriculture (USDA) statistics, from 1909-1918, crop losses resulting from conditions such as “drought…insect infestation…frost, excessive moisture, diseases, pests, and hot winds” amounted to an average annual loss of $2.6 billion.[6]   

[1] Federal Crop Insurance 1938-1982, Randall A. Kramer, Agricultural History, Vol. 57, No. 2 (Apr., 1983), p. 181
[2] Id., at 182
[3] Id.
[4] Id.
[5] Id.
[6] Id. 

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